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Energy Insights: Energy News: Oil demand seen lagging boom era growth

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Oil demand seen lagging boom era growth




A Phillips 66 logo is seen on a gas pump as a car is filled a Beck's station in Princeton, Illinois, U.S., on Monday, March 5, 2012. Prices have increased 15 percent this year and are 7.8 percent higher than a year earlier. Photographer: Daniel Acker/Bloomberg©Bloomberg

Factories and cars in fast-developing countries guzzled up the world’s growing oil supply at a swift rate in recent years.

Now as emerging economy growth forecasts are revised lower — China has slowed, while the prospects of countries from Russia to Brazil have dimmed — market participants are asking what this means for oil demand.

“We won’t see the oil demand growth of the past decade. There is only one China,” says Carsten Fritsch, analyst at Commerzbank. “But we will still see decent growth that is more broad-based, particularly as emerging markets such as India become more industrialised and demand for transportation fuels increase.’’

It was hoped that sharply lower oil prices since last June would help boost demand via a wealth transfer from producer countries to consumer nations. Although this has fed through of late, the outlook is “only getting murkier”, the International Energy Agency said on Wednesday.

Global oil demand growth is expected to recover by 2020 from the exceptionally weak gains last year. But it will fall short of the levels experienced during the boom years, according to the wealthy nations’ energy watchdog. World oil demand is expected to average 93.6m barrels per day in 2015, up from 92.5m b/d in 2014. That rise of 1.1m b/d however pales in comparison to growth of 3m b/d during 2010.

“After spending a lot of time thinking about peak oil supply we’re now talking about peak oil demand and that’s an extraordinary switch in 10 years,” says Neil Atkinson, head of analysis, at Lloyd’s List Intelligence.

“US oil consumption peaked in 2005 and similarly this has happened across major european countries and Japan. But even these emerging markets, from Asia to the Middle East, will reach this maturity. But until then the demand picture [in these countries] is very mixed,” he added.

Uncertainty about global demand growth, particularly as cyclical factors coincide with structural changes that include a shift away from oil in the energy mix and moves towards a lower energy intensity, has perturbed Ali Al Naimi, the oil minister of Saudi Arabia — the world’s largest oil exporter.

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“We will stand up, firmly and resolutely, in solidarity with a number of countries, against any attempt to marginalise the use of oil,” Mr Naimi said last week.

The Kingdom, in November, launched a battle to protect its market share over rivals, refusing to cut production to shore up the price of oil that had been falling precipitously. The aim was to maintain Saudi Arabia’s long-term competitiveness as well as oil’s place in the energy ecosystem, particularly as competition from both inside and outside Opec grows.

Cuneyt Kazokoglu, a consultant at FGE who specialises in oil demand, says: “Everyone is racing towards a cake that is, in some ways, getting smaller and smaller.” He estimates that global oil demand will only grow by a further 10 to 15m b/d before hitting a ceiling by around 2033. “This has massive implications for producer countries.”

After growing by an average of 5.6 per cent annually between 1960-1980 and 1.6 per cent between 1985-2010, FGE expects oil demand to grow by around 0.7 per cent over the next 20 years before it peaks. “This is the last era of growth”, says Mr Kazokoglu.

The IEA says mature OECD markets will see protracted contraction in oil demand in the next five years. At the same time the rest of the world is “no longer expected to provide as strong an offset as in the past.” Non-OECD oil demand is only expected to grow by 1.19m b/d annually to 2020, far less than its historical rate of growth.

China’s reorientation away from heavy manufacturing towards a consumer-focused economy has drastically slowed oil demand from the region that was the leading engine of growth for more than a decade.

“Even if China’s demographics and income levels point to higher demand particularly for transport fuels, it is doing as much as it can to diversify its energy supply away from oil and increase reliance on natural gas as well as nuclear and renewables,” says Rabah Arezki head of commodities research at the IMF.

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He adds: “They’ve moved past traditional cars to technologically-advanced, fuel-efficient vehicles. China is going to be at the forefront of these shifts given they have a need to switch away from oil quickly because of concerns about emissions and pollution.”

In the coming years countries such as India and Indonesia are a bright spot as political will to boost manufacturing aids demand while the population upgrades to cars from motorcycles. Lower oil prices have induced purchases, but analysts question if this will continue should prices rise again.

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Oil demand in the Middle East, particularly from exporter countries such as Saudi Arabia and Kuwait, has been stellar in recent years. But Laura El Katiri at the Oxford Institute for Energy Studies says should steps be taken to reduce subsidies, if more gas instead of crude and fuel oil is used for power generation, a slowdown in regional demand awaits.

Separately, if governance issues and geopolitical risk factors worsen in several African nations, economic growth could stall further, hampering oil demand even as the population of countries such as Nigeria and Ghana grow and incomes rise.

Under development in Venezuela and the economic woes of Brazil and Argentina are holding back growth. Meanwhile Russia is having to contend with the longer term impact of international sanctions and dramatically reduced revenues amid lower oil prices.

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